1H18 is weaker than expected however full year is unchanged
At its AGM, Nufarm (NUF) provided 1H18 guidance for operating EBIT to be between A$70-80m (down 6-18% on its 1H17 result of A$85m). Our forecast is now A$76.7, down 9.8% on the previous corresponding period. The weaker than expected earnings guidance reflects the impact of a six week plant shutdown at Laverton, Australia (A$5-10m hit) and a flat result in Latin America (previously targeting growth). Considering the challenging conditions this market has faced in CY17 (Brazilian market down 10% year on year as at October), a flat result is a credible outcome.
It is important to note NUF's first half is not an overly material period for the company as it accounts for about 25% of full year EBIT. Importantly, NUF continues to target earnings growth for the full year (before the European acquisitions) driven by a combination of revenue growth and cost saving benefits. The recent acquisitions are expected to close in 3QCY18, integration planning is well underway and their FY18 earnings contribution will be provided upon settlement.
We make minor revisions
Given NUF's 1H18 guidance was weaker than expected, we have made slight revisions to our forecasts. We still forecast solid earnings growth over the forecast period due to the performance improvement program, European acquisitions, new products and market share gains.
While it is disappointing that the 1H18 will be down on the previous corresponding period, we still believe NUF is well placed to report solid earnings growth over the coming years. We have seen the benefit of the company's geographic diversity today with weakness in some markets but overall earnings growth still expected for the full year. Its upcoming acquisition of two high-margin European product portfolios will strengthen its growth profile and earnings quality and, we believe, should gradually narrow its valuation discount to domestic and global peers.
Given its attractive growth profile and undemanding valuation, Nufarm remains our key pick for exposure to the Agriculture and Chemicals sector.
We retain our Add recommendation.
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Disclaimer(s): Analyst owns shares.
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